Understanding Professional Property Management Fees

[Heath Sizick]

I am hoping these posts are helpful. Today, I want to tackle property management fees!  While property management fees are important they must be viewed in light of what other firms are charging, the scope of services provided & the quality of those services.

A PM company is stewarding one of your biggest assets & the last thing you want to do is make your decision based solely (or even primarily) on who charges the lowest fees.  

A low price often indicates a lower service quality or a firm struggling to remain profitable -potentially leading to overworked managers. Price should be considered after confirming the firm offers quality services. Low fees won’t matter if the company doesn’t perform well or provide value to you.

Also, ensure you compare all potential fees, as hidden charges can negate any savings from lower management fees. Common fees to clarify with prospective firms include:

• Management Fee: Typically 8-12% of monthly rent, varying based on property size, location, & included services.
• Vacancy Fee: Some companies charge a vacancy fee even when there’s no rent coming in. Ensure contracts specify fees are based on “collected rent.”
• Set-up Fee: Fees for setting up an account range from $0-$500. Confirm if it's per unit or per property.
• Leasing Fee: This compensates for finding tenants & can be up to 100% of the first month's rent. Some prefer it bundled into the management fee to incentivize long-term tenants.

A good management company should view the management fee, NOT the leasing fee as the primary profit center. This is why leasing fees as a stand alone service (meaning without other property management services) are typically much higher (75-100% of first months rent).

A transparent fee structure discourages high turnover, benefiting both parties.

Good "pricing" questions to ask when vetting PM companies:

1. - How much is the leasing fee? This ranges from 25% to 100% of the first months rent, but 50% is pretty standard. Instead of charging a percentage, some firms charge a flat fee or a percentage of the gross amount for which the lease is written.
2. - Does their leasing fee decrease or get waived if it takes them an unreasonably long time to find a tenant?
3. - Is the leasing fee structured in a way that provides the firm incentive to bring in reliable tenants? This usually either means a full or partial refund (sometimes pro-rated) in the event that the tenant is evicted, or breaks their lease within 12 months of the original move in date. Some firms have a policy of only charging this fee once per 12 months per unit which has the same affect.
4. - Do they use leasing agents? If so, what will you have to pay them in the event they find you a tenant?
5. - Do they require exclusivity in advertising, or can you advertise the unit as well? If you find the tenant do you still pay the fee?
6. - Are there any restrictions or extra charges for showings (they only do X number a week, or not on weekends etc.)?

This should give you a good start! Best to you.

[Drew Sygit]

@Heath Sizick kudos for doing this!

Unfortunately, the PMC industry does a BAD job of promoting itself to property owners, so owners usually focus on the fees only - instead of service quality:(

That is until they get burned by poor service that costs them more money than the "pennies" they saved by going with the cheapest provider!

I spoke to two owners in July that had hired PMCs with no websites and no owner portal!
- Isn't this the 21st century?
- How'd they even find these PMCs?

Some thoughts on your specifics:

1) Lease/Placement Fee: Traditionally 100% of one month of rent as before Zillow, you had to put a property on the MLS to get exposure, along with yard signs, and that meant offering 50% of the 1-month fee to the other agent bringing a tenant-prospect. It also took a whole lot more time to advertise, answer calls and do showings.

Technology has supplied the industry with the 600lb gorilla called Zillow, which dominates the advertising space for rentals and sales. So, many PMC's no longer put their rentals on the MLS, they just post them to their website and their PM software syndicates the listing to Zillow and more. Since they don't have to pay another agent, they can drop their fee to 50% of 1-month of rent or just go flat fee.
- Unfortunately, most PMCs doing this do NOT tell their clients that they are NOT putting the property on the MLS. It would make more sense for PMCs to be transparent about this and give owners the choice.

2) Lowering Leasing/Placement Fee: why would a PMC lower their fee if the OWNER wants an unreasonably high rental rate and won't lower it after weeks on the market?

3) Lease Guarantees: these really should be tied to the Property Class. Most guarantees are for Class A properties - which should attract Class A tenants. Owners should expect less/shorter guarantees for lower Property Classes. 

5) Advertising: Zillow, and most websites, only allow a single ad - so how will an owner be able to also advertise their property without causing a mess?
- Also, no decent PMC will allow an owner to place their own tenant without waiving any tenant-related guarantees!

You didn't cover Lease Renewals! 
Challenge with them is owners don't want to pay anything for these, because they MISTAKENLY think they are so easy:( They think you just send the tenant a takie-it-or-leave-it amount. That may have worked for several years, but it is NOT working in most parts of the country which are experiencing flat rent rates and even decreasing rents.
- Also, this approach leads to more turnovers and PMCs actually make more money due to Leasing/Placement Fees!
- Owners should want a Renewal Fee that incentivizes PMCs to renew leases vs trying to make more money by replacing them.